I bought shares of Keck Seng Investments holding. It’s a simple idea that I was pointed to, for which I’m grateful.
I would like to record the reasoning here and a minimum required set of conclusions. This time I didn’t want to use complicated spreadsheets, which distract me from what’s important -- understanding the business.
I would like to record the reasoning here and a minimum required set of conclusions. This time I didn’t want to use complicated spreadsheets, which distract me from what’s important -- understanding the business.
Keck Seng is a company which owns hotels, as well as other kinds of commercial and real-estate properties, across multiple countries. The countries where it is present are US, Canada, Japan, Vietnam, China, Singapore, and Macau.
There are already good write ups about Keck Seng on which I have relied:
- “Keck Seng: 4-Star Real Estate Play Offers 5-Star Return With 149% Upside To NAV” [webarchive] on Seeking Alpha and its update [webarchive]
Its revenue is derived from the hotel operations, leasing out properties, and Macau club operations. The revenue is thus recurring to a significant degree and has been increasing as they continue to acquire more properties.
There are three parts to Keck Seng’s valuation: business earning power, net non-operating assets, and properties held for sale.
Unlevered FCFs attributable to equity (numbers are in HKD millions)
2 hotels, Vietnam
|
115.28
|
2 hotels, Canada
|
4.91
|
Holiday Inn, PRC
|
0
|
Best Western, Japan
|
13.31
|
2 hotels, US
|
204.35
|
332.94
| |
EV (3% growth)
|
4756.28
|
|
1819.79
|
= Equity
|
2936.49
|
Net non-operating assets mainly consist of cash:
Trading securities
|
9.51
|
Cash
|
1468.24
|
Taxation recoverable
|
10
|
Taxation payable
|
-22
|
Company’s debt
|
-39
|
1426.75
|
Properties held for sale are apartments in the complex called Ocean Gardens, Macau. The management is holding off selling it until the Hong Kong - Zhuhai - Macau bridge is completed, which should increase the price of the apartments. It is due in 2016-2018.
Apartments have been carried on the books at their historical cost and are not revalued. According to the Statistics and Census Service of Macau the average price per sq. foot as of Q4 2014 has reached 8000 MOP. Assuming 12% tax rate, 5% transaction cost, accounting for only 70.61% owned subsidiary and discounting the future cash flow from 2017, the effective price per sq foot becomes 3687.43 HKD.
Keck Seng is going to sell at least 298026.03 sq ft in Macau. Based on these assumptions the value of this cash flow should be at least 1098.95 HKD.
Hotels
|
2936.49
|
Non-operating assets
|
1426.75
|
Properties held for sale
|
1098.95
|
5462.19
| |
per share
|
16.05
|
Keck Seng is also good about paying the dividends. On average it have been paying out 35% of the FCF. It currently trades at 1.8% yield, but there’s an expectation of a dividend raise priced in.
Value of equity @ various dividend yields
6%
|
1942.15
|
4%
|
2913.22
|
2%
|
5286.45
|
Current market capitalization is equal to the value of the two 100% owned hotels in San Francisco and New York: $90 mil USD for “W San Francisco” plus $265 mil USD for “Sofitel New York”. The former is across from the Moscone Center and was bought in 2009 at a likely depressed price. The latter is in Manhattan and was bought just 6 months ago. This provides margin of safety.
I have established a ~15% position and my average cost is 7.99.
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